APRA looking to finalise its new remuneration framework

Tuesday, 23 February 2021

In response to the Banking Royal Commission, APRA put out a draft prudential standard that would have required boards to individually approve remuneration for certain highly paid material risk takers and mandated that 50 per cent of variable remuneration be based on non-financial measures.

The AICD opposed much of that standard and you can read our earlier submission here.

As a result of the AICD’s representations, as well as that by other stakeholders, APRA amended the draft standard and put out a new standard for consultation. The amended standard:

  • streamlined the board’s oversight role and clarified that boards do not have to approve individual remuneration outcomes, but rather will be required to approve on a cohort basis;
  • replaced the proposed 50 per cent cap on financial measures for variable remuneration with a requirement that ’material weight’ be assigned to non-financial measures;
  • moved to a more principles-based approach and reduce requirements for non- Significant Financial Institutions (SFI); and
  • reduced the minimum deferral periods.

The AICD welcomed APRA’s changes to its draft standard. We remained supportive of APRA’s objective to engage in stronger supervision of remuneration frameworks and focus on non-financial risk management.

The AICD considers it critical that boards retain responsibility and accountability for structuring executive remuneration and setting remuneration frameworks that are tailored to their organisation’s strategy and risk profile.

Our submission focussed on some concerns we still retained with the draft standard:

  • the level of reporting expected to the board remuneration committee, which is at odds with our understanding of recent regulatory review findings that information flows should be focused on quality over quantity;
  • the lengthy deferral periods that are proposed to apply to all APRA-regulated entities, which continues to remain out of step with international practice;
  • the prescriptive and mandatory criteria for the application of clawback, which does not fully recognise the complexity of the relevant employment law considerations;
  • the broad definition of an SFI which establishes too low a threshold relative to the Banking Executive Accountability Regime (BEAR); and
  • the lack of a more tailored application to RSE Licensees and mutuals, which does not recognise that variable remuneration is less common and complex in the superannuation and mutual bank sectors.

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